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Canadians cushioned against rising food prices

Canadians can be excused for wondering at the turmoil around the world over exploding food prices that threaten to starve some of the poorer parts of the developing world.

Organic green onions are seen at a farmers’ market in this recent file image. (TORONTO STAR FILE)

Wed., May 14, 2008

OTTAWA – Canadians can be excused for wondering at the turmoil around the world over exploding food prices that threaten to starve some of the poorer parts of the developing world.

When they go to their neighbourhood grocery stores, they see the shelves stocked pretty well as they always have been, and prices that – except on a few items such as baked goods, flour and pasta – have hardly moved from last year.

As far as the global food crisis is concerned, Canada has been like a blessed island of tranquility the rest of the world has forgotten.

"Even relative to our closest neighbour in the United States, food prices have been remarkably tame in the last year," said economist Avery Shenfeld of the Canadian Imperial Bank of Commerce.

"But after looking at what's behind that exceptional gap, it's clear that Canada's good luck on food prices is likely to run out in 2009."

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Not all are in agreement, or at least in total agreement. Bank of Canada governor Mark Carney recently testified before parliamentary committees that he believes inflation in Canada will remain relatively tame the rest of this year and throughout next year, and suggested food prices would at worst move north moderately.

"Canada is in a relatively unique position," said Carney. He attributed this to a number of mitigating factors, including the strong Canadian dollar, an oversupply in meat and pork and a very competitive grocery market as big box stores like Wal-Mart move into the food business.

He also pointed out that in developed countries like Canada high grain prices have a minimal impact on overall food prices because the cost of what we eat is mostly the result of processing. Raw materials only represent about one per cent of the total store shelf price of a box of corn flakes, he said as an example, so a spike in grain prices would not make corn flakes unaffordable any time soon.

Overall, the food component of the consumer price index edged up a minuscule 0.4 per cent in the past year, although bakery products were nine per cent pricier.

Much of this is thanks to the roughly 15 per cent appreciation of the Canadian dollar against the U.S. greenback. Many of the foods Canadians eat are imported and priced in U.S. dollars. As a result, the price of meat, fish and especially fresh fruit and vegetables are actually lower now than they were a year ago,

The loonie effect will pass through next year – meaning that imported foods are likely to reflect world prices more closely – but other factors continue to favour the Canadian grocery bill.

Last week, Wal-Mart announced it would expand its food-selling supercentre stores by between 25 and 27 outlets, ensuring that competition for customers remains fierce.

Another uniquely Canadian factor is the impact of marketing boards, particularly in dairy, which have had the impact of evening out price shocks precisely because they don't strictly adhere to market forces.

Shenfeld noted that while dairy products rose 11 per cent and eggs 30 per cent in the U.S. in March on a year-to-year basis, in Canada the increases were 2.8 and 2.3 per cent.

"Up to this point, there has not been pressure on the system to increase those support prices for butter and skim milk powder (which determine milk prices)," said Al Mussell, a senior research associate with the George Morris Centre, an agrifood think tank in Guelph, Ont.

Dairy support prices are set quarterly by the Canadian Dairy Commission on the recommendation of the provincial marketing boards and are based more on providing domestic farmers the support they need rather than in response to global forces. For instance, Mussell notes that during the mad cow scare, Canadian support prices were set higher in order to cushion farmers' losses in their livestock business.

Input costs play a part in the price set by the boards, which includes producers, but because of the strong loonie, he said, most input costs, including energy, have risen more moderately than in the U.S.

Mussell said it would take at least two years in the case of pork and as much as five years in the case of beef for the oversupply in those food products to work through the system.

Still, Shenfeld believes Canada won't be able to buck the world trend forever.

Even though marketing boards smooth out the bumps, Shenfeld notes that over time Canadian prices ultimately fall in line with what is happening in the U.S. And higher prices for energy, particularly in 2009 when the loonie will not be a deflating factor, feed grains and fertilizer will hike costs for producers.

As well, Ottawa has agreed to pay for a 10 per cent cull of the hog population in order to firm up pork prices.

Shenfeld said these factors should fatten food prices by 3.5 per cent next year, not exactly enough to cause food riots or shortages, but enough to end the holiday from reality Canadians have enjoyed so far.

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